Abstract

We review the existing literature on integrated production and risk hedging
with forwards/futures and options for a risk averse firm in single and multi
period settings. We illustrate the value of hedging joint price, basis, and yield
risks using forwards/futures and options. We then focus on a procurement
problem for a risk neutral commodity producer who sells to its buyer (with
a stochastic demand) via a long-term fixed-price contract, and trades intelligently in the spot market for the commodity. We solve a continuous time,
infinite horizon stochastic control problem in order to determine the optimal
policy for production and spot market trading.